The Great Debate UK

VAT rise – is it really that bad?

Rachel Mason is public relations manager at Fair Investment Company. The opinions expressed are her own.-

So the new coalition government is putting VAT up from 17.5 percent to 20 percent on January 4 2011 and the country is up in arms, but is it really that bad?

Okay, in an ideal world, taxes would be low and public services would be top quality, but sadly, the world we live in is not like that. The Institute of Economic Affairs (IEA) says Britain’s real debt is already 4.8 trillion percent – six times higher than the official figure of 772 billion pounds – and the simple fact is we need to pay it back, and to do that, the government needs to raise tax and cut spending.

A rise on income tax would have been a very unpopular move, so the government really only has one option left – VAT.

As George Osborne said, “This single tax measure will by the end of this Parliament generate over £13bn a year of extra revenues. That is 13 billion pounds we don’t have to find from extra spending cuts or income tax rises.”

Considering what VAT actually is, the reaction to the rise has been disproportionate. For a start – did anyone really notice a big difference when Labour cut VAT to 15 pounds? No? Well, we probably won’t notice a difference when it goes up by the same amount.

Roger Bootle analyses the potential impact of the budget

London-based Roger Bootle, director of Capital Economics and an advisor to business accountancy firm Deloitte, shares his thoughts on what Chancellor George Osborne’s budget may hold and its long-term effects on the economy.

Bootle suggests the coalition government must narrow the deficit for this year and give confidence to the markets that something will be done longer term to restore the economy to health.

Watch the video clip here:

Picture Credit: Chancellor George Osborne (L), sits with Deputy Prime Minister Nick Clegg during a meeting at number 10 Downing Street in London June 21, 2010. REUTERS/Dominic Lipinski/Pool

Key tests for the emergency budget

-Thomas Story is tax director at BDO LLP. The opinions expressed are his own.  Join Reuters for a live discussion with guests as UK Chancellor George Osborne makes  an emergency budget statement at 12:30 p.m. British time on Tuesday, June 22, 2010.-

Ten key tests by which Chancellor George Osborne will be judged when he delivers the emergency budget on Tuesday:

1. Do the tax measures make a significant contribution to reducing the fiscal deficit?

The Chancellor is caught on the horns of a dilemma with the promise of various tax cuts contained in the coalition agreement needing to be offset by larger tax rises in the emergency budget to help plug the gap in the government’s finances.  However, this may allow some targeted tax cuts to be introduced from 2011 but only in small steps as the economy improves.

2. Will the total tax take be re-focused towards indirect taxes upon consumption and away from taxes upon income and profits?

It would be a massive surprise if there was no announcement of a significant VAT uplift on Budget Day. On current projections VAT is anticipated to bring in 78 billion pounds for 2010-11 and a rise to 20 percent could add up to a further 11 billion pounds. Given that the Chancellor is unlikely to have an opportunity to raise VAT again this parliament, he may be tempted to raise the rate even higher with a promise to reduce it once the deficit is under control.

A budget of woes? Where has our imagination gone?

-Ruth Porter is communications manager at the Institute of Economic Affairs. The opinions expressed are her own. Join Reuters for a live discussion with guests as Chancellor George Osborne makes  an emergency budget statement at 12:30 p.m. British time on Tuesday, June 22, 2010.-

George Osborne has the chance to do something really radical on Tuesday in his budget statement.

He must cut public spending to shore up Britain’s precarious economic situation – he has no choice.

But the fiscal crisis also means he can do far more than this.

Indeed, the Chancellor has perhaps the best opportunity in a generation to make the sweeping changes necessary for the UK to reduce the size of the state and restore economic growth.

Imagine using the budget to restructure how we tax: flattening income taxes, reducing corporation tax, getting rid of bizarre exemptions to VAT, abolishing inheritance tax along with Capital Gains Tax and simplifying enormously the tax rules for individuals and businesses.

New UK coalition deserves 7 out of 10

– Hugo Dixon is a Reuters Breakingviews columnist. The opinions expressed are his own –

The new UK coalition deserves 7 out of 10. The pact between the Conservative and Liberal Democrat parties, led by David Cameron as the new prime minister, seems determined to address the country’s most important problem — the deficit. This is vital given that the euro zone debt crisis could still prove contagious. It should also be positive for sterling.

Some good ideas are also emerging on tax and spending. But other plans for tax and banks look odd — and there are doubts about whether these bedfellows will be able to work together. After all, Britain has not had a coalition government since World War Two.

Some will be disappointed that George Osborne, who has not been impressive as the Tories’ finance spokesman, will be Chancellor of the Exchequer. But the overall policy stance looks promising. The new government clearly sees dealing with the mess in the public finances as its top priority. The LibDems, led by Nick Clegg, have signed up to Cameron’s plan to find 6 billion pounds in efficiency savings in the current financial year.

This is, of course, only a pin prick given that the deficit is expected to top 160 billion pounds, or 11 percent of GDP. But it is reinforced by several other measures: an as-yet vague promise to significantly accelerate action on borrowing; an emergency budget within 50 days; and plans to involve both the Bank of England and a new Office of Budget Responsibility in vetting budget plans. Asking a bunch of technocrats for advice could give the new government the necessary alibi to implement more savage cuts than the Tories indicated during the election campaign.

The specifics on tax — insofar as they have been revealed — are more mixed. On the positive side, there will be a move to equalise capital gains and income tax rates. That will both raise cash and prevent the tax arbitrage encouraged by the current system. The Tories have also downgraded a promise to increase inheritance tax thresholds.

Unfortunately, there are also several expensive tax promises. In the horse-trading over the coalition, the LibDems have won backing for their plan to raise the income tax threshold to 10,000 pounds. Meanwhile, the Tories are sticking to their plan to scrap the former government’s decision to raise employers’ national income contributions (NIC). The best thing that can be said about these plans is that the former will be phased in while the Tories are at least keeping the planned NIC increase for workers.

The UK should not waste its fiscal crisis

–  The author is a Reuters Breakingviews columnist. The opinions expressed are his own  –

 The UK should not waste its fiscal crisis. As Britain embarks on its election campaign, this is a perfect opportunity to engage in radical tax and spending reforms designed not just to restore the country’s fiscal balance but to boost its long-term productivity and competitiveness.

It is, of course, necessary to cut the deficit, which is currently running at an unsustainable 12 percent of GDP. It is also important that spending cuts rather than tax rises bear the brunt of the belt-tightening. Otherwise, the UK will find that companies and rich people are increasingly driven off-shore.

The two main political parties — the Labour government and the opposition Conservatives — broadly buy into this. However, neither party has spelt out what spending it would cut and where it would raise taxes. Nor have they given any inkling of seeking to take advantage of the crisis to push through deep-seated reforms. They are unlikely to do so during the coming campaign, fearing that too much detail will scare the voters.

GUIDING PRINCIPLES

Nevertheless, the next government, faced with the immensity of its fiscal challenge, will be forced to slaughter at least some sacred cows. What then are the principles that should guide it?

First, simplicity. The current tax system is a patchwork quilt of loopholes, allowances and special arrangements. This is an incentive to engage in elaborate contortions to avoid tax.

A tough spring in store for the pound

- Jane Foley is research director at Forex.com. The opinions expressed are her own.-

The pound has started the year on a negative note.  Ongoing concerns over the budget deficit, an impending general election, the prospect that the Bank of England (BoE) may yet increase quantitative easing (QE) and a drop in consumer confidence are all clouding the outlook.

That said, sterling has already paid a high price for its weak fundamentals.  In 2009 EUR/GBP averaged 0.8909, this is 17 percent higher than its average in the 12 months leading to the Northern Rock crisis and 35 percent above the average rate between 2000-07.

A lot of bad news is in the price but a sustained sterling recovery is unlikely until there are concrete signs of resolution to the UK’s deficit problem.

In the midst of the deficit concerns, the government is still too uncertain about the prospects for economic growth to stiffen its commitment to austerity and, according to opinion polls, the opposition is not enjoying a decent enough lead to ensure it of election success.

This has left the pound worried by the possibility that this spring’s general election may produce a hung parliament and sensitive to the brutal suggestion from Pimco that if Labour return to power the UK may suffer a credit downgrade.

On a more positive note, the UK most likely emerged from recession in Q4.  This is hardly a cause for celebration, however, since most major economies emerged in Q2 or in Q3.

Pre-budget report delicate balancing act for Darling

– Thomas Story is tax director at BDO. He will participate in a Reuters pre-budget live blog on Dec. 9, at 12 p.m. British time. The opinions expressed are his own. -

Alistair Darling is facing the most difficult set of economic circumstances for any chancellor since the 1940s, with the projected substantial fiscal deficits for 2009 – 2010 and 2010 – 2011 likely to be revised upwards from 175 billion pounds to well in excess of 200 billion pounds. He must perform a delicate balancing act to secure the confidence of the global financial markets while protecting any fragile economic recovery and boosting public confidence.

The Chancellor is likely to increase the yield from income tax, national insurance, VAT and customs duties, which are the biggest revenue generators for the Government.

I think we’ll see the restriction or removal of corporation tax reliefs but, if the chancellor takes this course of action, he should recognise the continued impact of the credit crunch by exempting losses accumulated up to March 2010.

There could also be a boost for the hard-hit construction sector by cutting VAT on repair and refurbishment of residential property to five per cent (or even to the nil VAT rate). Elsewhere in the sector, the chancellor may crack down on certain Stamp Duty Land Tax planning arrangements for very large commercial real estate transactions. He should further clarify the anti-avoidance provisions as lobbied for by the real estate sector.

Individual taxpayers will probably escape any change to the basic and higher rates of income tax, but the chancellor may try to generate more revenue from national insurance by increasing the upper earnings limit or contribution rates or restrict personal tax reliefs for individuals paying income tax at the 40 per cent rate and the proposed 50 per cent rate.

Individual taxpayers could even be hit by an increase in VAT from 17.5 per cent to 20 per cent (or even more) but only to take effect from July 2010 0r January 2011.

Budget boost for savers

–Fay Goddard is chief executive of the Personal Finance Society. The opinions expressed are her own.–

As predicted, Budget 2009 was heavy on figures and forecasts and hard on the highest earners. Unsurprisingly it is the latter that the press has picked up on. We all knew that there would be a new top rate of income tax – though some were taken by surprise at the rate of 50 percent and the speed at which it will be introduced.

This wasn’t the only hit taken by those on big salaries with restrictions on pension tax relief for those on over £150K and personal allowances for those earning over £100K. These changes will be of concern and mean that financial advisers will need to review the position of their affected clients. However, advisers will have breathed a sign of relief as the rumoured removal of all higher rate tax relief on pensions did not materialise.

There was better news though for savers. The rise in ISA limits is a welcome move and will be available immediately for those over 50, with everyone else having to wait until next year. Whilst I assume this is aimed at providing some immediate assistance to those who rely on their savings to generate income, with interest rates so low, the increase will not deliver much benefit. At least some pensioners will also receive additional tax credits though.

Help for families came in the form of increased child tax credit, and for those who lose their job in these troubling times statutory redundancy pay has been increased.

Those looking to buy houses under £175K will continue to benefit from the stamp duty holiday – this was extended by a further six months until the end of the calendar year but there was little else to stimulate the housing market.

Pre-budget report: Who wins and who will pay for it?

Mark Schofield is a  tax partner at PricewaterhouseCoopers LLP. The views expressed are his own.

There were a number of initiatives unveiled to kick start the UK economy which will increase the budget deficit for 2009/2010 to £118 billion. The Chancellor assured the House of Commons that finances would be back in balance by 2013/14 at which point the country “will only be borrowing to fund investment”. By that year the net UK government debt will be over £1 trillion representing 57.4% of GDP, compared with an estimate of £602 billion, 39.4%, for 2008/9.

Who wins with fiscal stimulus and who will pay for it? In short, everyone wins with the temporary reduction in the VAT rate to 15%, the deferral of previously announced tax rises, making permanent the compensation for the abolition of the 10p tax rate and extra help for families with children, and pensioners. There was help for business too with the ability for small and medium sized businesses to spread tax payments where they have difficulty making them. The reform of the taxation of foreign profits including the introduction of an exemption from UK taxation of foreign dividends took a significant step forward. The details of these reforms will be published next week and are eagerly awaited to see whether the overall package addresses the concerns raised previously raised.

There is a cost to all this, primarily from the reduction in the VAT rate. That will be financed by extra efficiencies in public spending, increases in National Insurance Contributions for both employers and employees, the restriction of personal allowances for those earning over £100,000 a year, and a new top rate of tax of 45% for incomes over £150,000 a year, the rises all to take effect from 2011.

Overall, a complex package with a number of initiatives intended to stimulate fiscally but also to bring the books back into balance on a year by year basis at a later date. Given the current uncertainties, time will tell whether it achieves the desired effect.